Where was the board?

Fuente: Ethical Boardroom

Autor: Helle Bank Jorgensen – CEO, Competent Boards

The question ‘where was the board?’ is often asked when an unethical issue has made its way into the news. With the speed at which information is delivered through social media, news can quickly proliferate and, as a result, judgement can make or break a company in a short period of time.

A reputation that has taken years to build can be destroyed in minutes when a company is deemed to be unethical. Many of the issues that are now hitting the news are related to sustainability, ESG (environmental, social and governance) and climate. These are precisely the issues that talent, customers and increasingly investors are valuing, making the need to manage and govern a company’s impact in these areas more and more important.

This begs the question: do board members have the insight needed to provide oversight when it comes to sustainability, ESG and climate? Do they have the insight needed to make the ethical decisions that more and more shareholders, as well as stakeholders, are expecting?

“I think a board member who can’t articulate the most material environmental, social, and governance factors for their own company is in breach of fiduciary duty,” said Erika Karp, founder and CEO of Cornerstone  Capital Group and contributor to the Competent Boards Certificate Program.

Boards are feeling the pressure

In a 2019 survey conducted by the National Association of Corporate Directors (NACD), 73 per cent of directors reported that board leadership is more challenging now compared to what it was three years ago, and 84 per cent reported that performance expectations have gone up for all board members. As the stakes for boards of directors continue to rise, so does the uncertainty of whether the director’s insurance policy will protect the director and when the director is in breach of the fiduciary duty/duty of care. So, in a time where a company’s actions and decisions are watched closer than ever, boards must understand the positive and negative impacts of their business decisions in order to earn their own licence to operate as a board member.

We are often backward-looking when it comes to identifying problems and solving them. Instead of being only problem solvers, we might want to look upstream, mitigate risks and utilise opportunities. As stated by Paul Dickinson, CEO of CDP, in one of Competent Boards’ interviews: “There are Kodak moments looming across practically every area of our industrial and commercial system. And the opportunities are great, and the risks are great and it’s tremendously exciting. I think the leaders that embrace the future and don’t deny its existence are the ones that are going to do well.’’ As we continue to see sustainability as a means to identify current and future material risks, it is important to consider how these areas can better inform board decisions and ensure future-fit businesses.

What investors want?

Investors want to see more than just a sustainability report; in fact, they often want to see more than an integrated report. They are requesting ongoing engagement with board members. With the positive and negative impact that ESG considerations can have on a company’s financial performance and shareholder value, investors are increasingly looking to better understand a company’s long-term plan and how sustainability, ESG and climate will impact the strategy. As there continues to be a gap in the information that companies are disclosing, and the information shareholders seek, investors are seeing the value of entering an ongoing dialogue with the companies they invest in. And they increasingly want to talk directly to the board members.

Further, as we’ve heard from many of the more than 60 global leaders we interviewed for our Certificate Program, investors are and will increasingly be evaluating board members and the degree to which their ESG expertise is up to date. So, if a board member isn’t able to articulate the company’s long-term ESG strategy, the information gap will remain, resulting in a seemingly higher risk profile from an investor’s perspective.

What is the value of a well-informed decision?

Being able to understand ESG risks and engage in discourse will not only reduce risks, but it will also allow board members to understand the changing needs of investors and prepare for ESG-focussed shareholder proposals. According to a 2019 Nasdaq study, a majority (80 per cent) of S&P 100 companies highlighted environmental and sustainability issues as priorities in proxies this year.

When it comes to climate change, there are a growing number of demands from other stakeholders who want to see climate action and commitment from companies. It is becoming increasingly difficult to ignore the signs from customers and employees who are dissatisfied with business’ inaction. Climate strikes have become an international phenomenon and employees are taking a stance. Earlier this year, Amazon employees walked out in protest over the company’s climate change policies or lack thereof.

Moreover, inaction can translate into legacy issues. Much like asbestos or companies involved in sweatshops, the companies (and those making decisions) that remain complacent, while aware of their impacts and emissions, will be remembered. And for those companies that survive, the accumulated costs of the consequences of uninformed and unethical decisions are significant.

It’s a cost that will be paid not only by the shareholders but also by the board of directors. So, the costs of the question ‘where was the board?’ can be very high, both in financial and legacy terms.

More than reputational risks

Climate risk goes beyond reputational risk and can impact the long-term viability of the business and society. If your company is not able to access its raw materials because of climate change, then your business is at risk. If a company and its board do not have a climate change action plan, they will be left behind, lose investors, and in some cases cease to exist.

Being climate competent and understanding ESG principles will enable boards to look at risk through a different lens and map out current and future risks. With this knowledge, companies will have the foresight needed to be ahead of the curve on not only stakeholder demands, but also stock exchange requirements and regulatory demands. A sentiment that has been echoed in many of the interviews we have conducted with global business leaders is the prediction that we will see regulatory frameworks expand in the area of sustainability, and those businesses that have started acting will be the ones leading the way

According to the Governor of the Bank of England, Mark Carney, major corporations will have two years to agree on rules for reporting on climate risks before global regulators develop their own and make them compulsory. Further, the leader of the UK Labour party stated that companies will be delisted from the London Stock Exchange if they fail to meet environmental criteria.

Take advantage of the opportunity before it is too late

Being knowledgeable on sustainability aspects of your business, industry and market will allow you to help your business take advantage of the opportunities presented by ESG, climate change, diversity, the Sustainable Development Goals (SDGs), etc.

Boards that can have a candid discussion about purpose, build their strategy, and set a tone from the top around that purpose, will increase stakeholder trust and their ability to be seen as relevant. This can provide endless opportunities to attract investors, customers and talent.

In addition to increasing productivity, companies are looking to invest in opportunities that will solve global sustainability issues such as climate change. For example, the SDGs can be seen as a long-term forecast for what is coming in future decades, which leading companies view as a directory for business opportunities to invest in. In an interview with Torben Möger Pedersen, CEO, PensionDanmark, he specified that by looking into national SDGs programmes ‘it’s like looking into a big catalogue of investment and exporting opportunities for investors and companies.”

Paul Polman, Former CEO Unilever and a contributor to the Competent Boards Certificate Program said: “Competent Boards will share knowledge, experience and insight to help train board members on how to capitalise on the opportunities the SDGs present”.

Five questions boards should ask themselves

An ill-informed decision cannot only cost a company, but also the board of directors its reputation and licence to operate. To ensure that the board avoids such damaging decisions, here are five questions boards should ask themselves:

1. Do we, the board, have the insight needed to provide proper oversight?

2. Do we, the board, understand what can disrupt the business or how the business can be a disruptor?

3. Do we, the board, understand scenario planning in relation to sustainability, ESG and climate-related issues and opportunities?

4. Who on the board has the competencies related to sustainability, ESG, climate, diversity, human rights, supply chain, SDGs, anti-corruption, data use, cybersecurity, tax, investment, pay, engagement and disclosure?

5. Are we, as the board, fit for the future, or do we need education in these areas?